Navigant Research Blog

In my last blog post, I discussed seven megatrends that are fundamentally changing how we produce and use power. In this blog, I discuss how customer choice and changing customer demands have become the leading drivers of industry transformation.

Move from “Big Power to Small Energy”

Customer choice is driving a large move from big power to small energy. More and more customers are choosing to install distributed energy resources (DER) on their premises. DER solutions include distributed generation, demand response, energy efficiency, distributed storage, microgrids, and electric vehicles. This year, DER deployments will reach 30 GW in the United States. According to the U.S. Energy Information Administration (EIA), central generation net capacity additions (new generation additions minus retirements) are estimated at 19.7 GW in 2016. This means that DER is already growing significantly faster than central generation. On a 5-year basis (2015-2019), DER in the United States is growing almost 3 times faster than central generation (168 GW vs. 57 GW). This trend varies by region because policy approaches, market dynamics, and structures vary. However, the overall move to small power will persist. In other words, the movement toward customer-centric solutions and DER will ultimately become commonplace worldwide.

Customers want to self-generate and sell that power back to the grid. Customers also want new energy management products and services from their utility or other providers. The rise of the prosumer and active consumer movement is being fueled by three things:

A growing number of customers care about how and where their energy is generated and about the impacts of global warming.

New and disruptive entrants are rapidly emerging that give customers meaningful energy usage insights and options related to their homes, businesses, and transportation choices.

Where we see this movement picking up pace is in the increased number of commercial and industrial (C&I) customers that are choosing to implement their own more sustainable energy solutions. Amazon, Apple, Cisco, Google, Honda, Walmart, and other large energy users have increased their focus on installing onsite solar. Walmart has 142 MW of solar PV capacity at 348 installations in the United States, according to the Solar Energy Industries Association’s (SEIA’s) Solar Means Business 2015: Top U.S. Corporate Solar Users report. The retail company has a 100% renewable energy target, together with 57 others currently as part of RE100. And then there is the “Power Forward” movement, where 215 Fortune 500 companies are pursuing their own investments in local greenhouse gas (GHG) reductions, sustainability, or renewable energy initiatives. Power Forward 2.0 states that if incumbent utilities are not proactive (e.g., offer power purchases agreements, financing, rates, or project development), then they will be bypassed in favor of third-party energy providers (including non-regulated subsidiaries of incumbent utilities).

What Is New?

The focus on customer engagement and improving the customer experience is not new. In recent years, utilities have tried to improve the customer experience by introducing broader self-service, multi-channel options, and advanced information on energy products and usage. Such improvements include offering energy management applications like DTE’s Insight app.

What is new (and isn’t getting enough attention) are the actual implications of customer choice. With the increased availability of DER and new energy management technologies, the breadth and diversity of customer needs and interests that the utility will have to deal with are growing exponentially. Meeting diverse and changing customer demands is forcing utilities to rethink their role in the energy value chain. The range of possible services goes well beyond what they currently provide, including building energy management solutions, fast demand response, distributed generation, storage, microgrids, etc. Utilities must understand the full impact of all this on their customer service processes and systems. They must also understand how DER and advanced energy management solutions will affect their strategy, product innovation, business models, and the way they operate the grid. Taking an integrated and holistic approach is key.

Who Else Wants to Play?

Besides the incumbent utility, we see new entrants coming into the market that are focused on meeting the changing demands of large energy users. In the last 6 months, we have seen several announcements of new business models going after this market. Some examples are described below.

Edison International is launching a business that will help reduce energy costs, improve efficiency, and offer more environmentally friendly options for large energy users. The company’s new subsidiary, Edison Energy, aims to serve commercial buildings, data centers, retail centers, healthcare operations, and educational institutions nationwide.

What Does All This Mean for the Incumbent Utility?

The incumbent utility (which includes the traditional competitive retailer not offering DER) has to adapt. Customers will look for better, greener, and cheaper alternatives, and more and more of these alternatives are becoming available. What’s more, the fight has started for the business of large C&I customers. If only a small percentage of large C&I customers switch over, the incumbent utilities will be in trouble. This will affect their revenue streams, roles, and the cost versus value of the centralized managed grid.

Facing declining revenue as customers consume less and produce more of their own power, utilities are faced with potential stranded generation (and eventually transmission and distribution) assets. This makes it even harder to make large investments (aimed at improving reliability and resilience) in their current grid while also making it more intelligent. And finally, they have to make investments in developing DER capabilities, offerings, and businesses. Given these challenges, utilities must play both defense and offense.

An updated defensive strategy will entail:

Engaging with customers to understand their customer choices and changing demands vis-a-vis price and reliability.

Engaging with regulators to find equitable ways to charge net metering customers for transmission and distribution services that fairly address the cost to serve.

Improving customer service and grid reliability at the lowest prices possible.

Create new revenue streams through the development of new business models, products, and services.

Transform their organizations and culture in order to fully integrate sales, customer service, and operations.

Upgrade the grid and operations to facilitate the integration of DER.

The above objectives can only be accomplished by implementing new business models that include developing, owning, and operating integrated DER such as community solar, customer-sited storage, microgrids, charging stations, building energy management systems, and home energy management systems. These goals also require utilities to provide third-party financing for DER and offer new products and services focused on energy efficiency and demand response.

There is no going back to the old ways of doing business. Utilities must lead—by playing both defense and offense—or they run the risk of being sidelined.

This is the second in a series of posts in which I will discuss each of the power industry megatrends and impacts (“so what?”) in more detail. My next blog will cover the rising number of carbon emissions reduction policies and regulations. Stay tuned.

The pace and impact of change in the utilities industry is unrelenting. Each of the following megatrends is changing the way we produce and use power globally. Together, these megatrends are revolutionizing the industry.

The power of customer choice and changing demands:More customers want to control their electricity usage and spend, as well as when and what type of power they buy. Customers want the ability to self-generate and sell that power back to the grid. Amazon, Apple, Cisco, Google, Honda, Walmart, and many other large energy buyers have increased their focus on sustainable energy solutions. This trend, in turn, is forcing new power purchase agreements with the incumbent utilities in order to minimize their risk of losing significant load. For example, a second (Google was the first) major technology company, Cisco, has confirmed that it is using Duke Energy’s Green Source Rider to provide clean energy for its North Carolina operations.

Rising number of carbon emissions reduction policies and regulations:The impact of COP21 will be significant. Navigant believes that the “hold” on the U.S. Environmental Protection Agency (EPA) is temporary, and state governments and utilities are not waiting. They are taking actions now to be compliant. In fact, sustainability objectives between government, policymakers, utilities, and their customers are much more closely aligned than ever before.

Shifting power-generating sources: U.S. electric-generating facilities expect to add more than 26 GW of utility-scale generating capacity to the power grid during 2016. Most of these additions will come from three resources: solar (9.5 GW), natural gas (8.0 GW), and wind (6.8 GW), which together make up 93% of the expected total additions. Existing assets (coal, but also nuclear) are devaluing and are at risk of becoming stranded as source shifting continues and newer natural gas and renewable generation sources come online.

Delivering shareholder value through mergers and acquisitions (M&A): New industry ventures and M&A are happening at a rapid pace. Exelon’s acquisition of Pepco, Southern Company acquiring SoCoGas, Duke acquiring Piedmont Gas, Emera acquiring TECO, etc. In search for shareholder value through scale and increased synergies, this is a path that utilities will continue to explore.

Regionalizing of energy resources (interstate, north-south, global): In order to provide reliable and affordable power, more energy resources are being regionalized. For example, PacifiCorp and Puget Sound Energy (PSE) and, later this year, NV Energy is joining California ISO. One of the main drivers is to achieve the benefits to manage local differences with regard to renewables, wind, and solar. Another example is Florida Power & Light’s (FPL’s) investment in natural gas exploration and production companies in Oklahoma and gas transmission pipelines to secure fuels for its natural gas combined cycle plants in Florida. Meanwhile, the global availability and movement of natural gas has created an abundance of natural gas. Some of the world’s biggest entrants into the growing global gas market have considered investing in power plants and other big projects now that their multibillion-dollar exporter terminals are about to open, executives said at the Columbia Global Energy Summit on April 27.

Merging industries and new entrants: Several industries, including utilities, oil and gas (O&G), technology, manufacturers, OEMs, etc., are merging around areas like renewables, distributed energy resources (DER), energy management, smarter cities, and transportation. Navigant sees many cross-industry movements, and one of them is increased crossover investments between the electric utility and O&G industries. We see utilities investing in natural gas assets. And we see oil companies making investments in utilities. We also see both making investments in new areas of opportunity, like renewables, DER (distributed generation, energy efficiency, demand response, energy efficiency, etc.), transportation, smart infrastructure and cities, and energy management. That’s why the announcement in April by French supermajor Total is not a surprise to me. Total announced the creation of a Gas, Renewables and Power division, which it said will help drive its ambition to become a top renewables and electricity trading player within 20 years. According to a statement by the supermajor, “Gas, Renewables and Power will spearhead Total’s ambitions in the electricity value chain by expanding in gas midstream and downstream, renewable energies and energy efficiency.”

The emerging Energy Cloud: Old infrastructure is being replaced and geared toward an increasingly decentralized and smarter power grid architecture known as the Energy Cloud. The Energy Cloud is an emerging platform of two-way power flows and intelligent grid architecture expected to ultimately deliver higher quality power. While this shift poses significant risks to incumbent power utilities, it also offers major opportunities in a market that is becoming more open, competitive, and innovative. Fueled by steady increases in DER, this shift will affect policy and regulation, business models, and the way the grid is operated in every single region of the world.

These megatrends cannot be underestimated. They are accelerating transformation in the energy industry, enabling the entry of new players, putting pressure on incumbent players, and altering traditional strategies and business models. Organizations will need to adapt, and there will be winners and losers as this transformation takes shape. My advice to senior leadership of energy companies is to take an integrated, holistic view of the opportunities and challenges that are flowing from these megatrends. Only then will you be able understand the full impacts and path forward. And that is the only way you can really take control of your future.

This post is the first in a series in which I will discuss each of the megatrends and the impacts (“so what?”) in more detail. Stay tuned.

In my blog, “The Impacts of the Evolving Energy Cloud,” I discussed how the power sector is undergoing a fundamental transformation. It is transitioning from a centralized hub-and-spoke grid architecture based on large centralized generation assets toward a more decentralized grid with a bigger role for renewables and distributed energy resources (DER). Navigant calls this new grid the Energy Cloud.

Where networks of networks exist, the business model that Wharton School dubbed the network orchestrator has been found to achieve faster growth, larger profit margins, and higher valuations relative to revenue, compared to three other types of business models (asset builder, service provider, and technology creator). The network orchestrator role will capture value by tailoring electricity supply and demand services for a customer, utility, or grid operator. In Navigant’s latest article in Public Utility Fortnightly, we explore how network orchestrators will emerge from the developing Energy Cloud and who might be candidates for such a role.

The New Uber

This week, in an interview with Energy Post, RWE’s Head of Innovation Inken Braunschmidt talked about the different business models that RWE is pursuing to capture an important position in the future energy system in Europe. She states, “In that energy system, it’s much more about sharing … you go onto a platform and say: I have electricity left over from wind or today I want to order some electricity from wind. It will be like ordering Uber.” This is a good example of how a large utility wants to transform its business and build a network orchestrator business model on top of its traditional business models. Many utilities have recently started new businesses, evaluating and making the initial investment in network orchestrator roles in areas like virtual power plants, building energy management systems, microgrids, storage, and others.

Another example this week was General Electric’s (GE’s) announcement of Current, powered by GE, an energy company that integrates GE’s LED, Solar, Energy Storage, and Electric Vehicle businesses to identify and deliver cost-effective, efficient energy solutions to its customers. This is clearly a move to become more of an orchestrator. The new company combines GE’s products and services in energy efficiency, solar, storage, and onsite power with its digital and analytical capabilities to provide customers—hospitals, universities, retail stores, and cities—with more profitable energy solutions.

Since companies employing the network orchestrator business model outperform other types of companies on several significant dimensions, it may only be a matter of time before pure network orchestrators emerge and establish themselves as key orchestrators within the Energy Cloud. As in other industries, Navigant strongly believes that new players will enter this field to become the network orchestrators of the utility industry.

So with that said: Who will be the Uber of the utilities industry? More to come on this soon.

In my July 2014 blog, I discussed how utilities should play both offense and defense as the energy cloud evolves and transforms the energy sector. Navigant Research’s new white paper, authored by Mackinnon Lawrence and Eric Woods, provides an update on the evolution of the energy cloud. To summarize, we foresee the strategic, business model, and operational impacts on incumbent utilities increasing, more so as new entrants play important roles in states like Hawaii, California, Arizona, Colorado, New York, New Jersey, and the Carolinas.

Distributed energy resources (as detailed in Navigant Research’s report, Global Distributed Generation Deployment Forecast) and renewables will continue to grow exponentially over the next 5–10 years globally, driven by expanding customer choices and a rapidly changing technology landscape. This will dramatically affect utilities’ customer relationships and increase the complexity of their operations as distributed, intermittent, renewable energy resources spread and the grid becomes more and more digitized. Below is an overview of the highlights of the themes we see evolving rapidly.

Customer Relationships: The further evolution of distributed generation, energy efficiency, demand-side management, demand response, smart metering, behind-the-meter energy management systems, and social media will drastically change the way utilities interact with their customers—many of whom will generate their own power, sell power back into the grid, and plug in their electric vehicles at night. These increasingly sophisticated energy customers expect increased self-service and new products and services, which in turn will require innovative front- and back-office customer operations. This is likely to lead, in many cases, to a strategic pivot in how utilities proactively engage with customers.

Operations: Increasing the return on capital investments and reducing operating expenditures has historically been a priority for utilities. As the energy cloud revolution spreads, the importance of managing assets and capital will only increase. Utilities must give special consideration to managing assets, particularly procurement and the decommissioning of stranded assets. Additionally, utilities will look to build or acquire distributed energy resources and other disruptive technologies that transform day-to-day grid operations while maintaining security and reliability through climate change and other major shifts.

Regulation: All of this will also have a profound impact on regulatory policy, raising the question: will current deregulated market structures be forced to change? The utility industry is vital for the global economy, and is regulated as such. As the energy cloud matures, the regulatory environment can and must change. For a more detailed examination of likely regulatory shifts, please see this blog by Mackinnon Lawrence.

Ultimately, the objective is to provide a safe, reliable, and affordable service to customers. But a fragmented landscape of players (developers, producers and operators, wholesale and retail) will drive the need for organizational, infrastructural, process and data integration, and coordination across the power value chain and could create significant cost in a highly distributed energy infrastructure environment. It will be very interesting to see how markets will evolve as the energy cloud transformation takes hold. More to come…